06/08/2013 11:30 BST | Updated 05/10/2013 06:12 BST

Zero Hours Contracts Distort the True Cost of Labour

New research suggests that more than a million workers in the UK are now on zero hours contracts, and Vince Cable has responded as all government ministers do when faced with a politically inexpedient controversy, by ordering a review. Cable is in a tricky position; he knows that businesses need all the help they can get at the moment, and with his party's success dependent upon an economic recovery, he will be reluctant to impose new regulations and restrictions upon businesses.

The tide of public opinion has been steadily turning against large corporations since the beginning of the economic downturn. Many hold the view that successive governments are (you can take your pick) too afraid to stand up to business leaders/in league with those who seek to profit by exploiting the average worker/obsessed with lowering taxes on CEOs and some of the most profitable corporations in the world. This research will only add fuel to the flames and Cable will find it difficult to defend a practice most of his party will naturally view as illiberal and immoral.

Zero hours contracts often provide uncertain lives for workers, who are only nominally employed and must be on permanent standby. They have an erratic stream of income which makes it challenging to manage budgets, bills and other commitments. Employees are expected to be 'on call' for their employers but employers are under no obligation to offer work. Some employers can also limit their liabilities by minimizing employee benefits such as sick pay or pension contributions.

The argument in favour of zero hours contracts is that employers can be flexible in adapting to shifts or a volatile demand for work, which reduces the risk of taking on staff and may ultimately allow them to employ more staff. The economic argument is flawed. In rare cases, there may be a justification for small businesses to use zero hours contracts where demand for services may vary wildly; for example, a small catering firm around the holiday season. For most businesses, particularly large corporations like Amazon and Sports Direct, zero hours contracts simply shift the externalities of the cost of labour to workers and taxpayers.

Zero hours contracts drive down the cost of labour for employers. Workers have to be constantly available but will not be paid for any time that they are not on work premises. Employers effectively have an option to call in labour at a time of their choosing or not at all. This option clearly has benefits for the employer including flexibility and reduced employer contributions, and a cost to the employee, including an inability to search for other work, and the time they spend sitting by the phone, uncertain whether a call will come. Yet these contracts are allowed to distort the cost of labour by allowing the employer to make use of these options for free.

Zero hours contracts enable an inefficient use of workers, who might be happy with and capable of working 40 hour weeks, but forced to work a 10 hour week; workers who are underemployed yet technically counted as employed, and unable to look for more productive jobs. These employers contribute little to the development of the workforce's skills, having no incentive to develop human capital and to provide training for workers.

These contracts may also have a detrimental impact on the quality of certain services, particularly in industries such as health and social care, where zero hours contracts are widely used. A high turnover of staff means that it is difficult for patients to form bonds with their carers; the lack of training and consistency of work for staff may lead to a lower quality of service.

Cable should conclude that there may be justification for zero hours contracts to be used in a small minority of cases. In the vast majority of cases, these contracts are neither socially nor economically viable, and simply shift costs from employers onto the worker, and the taxpayer, who may ultimately end up paying for the pensions and health care bills of workers who simply cannot afford to survive.